We preview Millat Tractors 4QFY13 result and foresee that company willreport a net profit of PKR605mn (EPS PKR15.03) up by 84% QoQ, while FY13net earnings are projected to clock in at PKR2,033mn (EPS 50.50) showing anincrease of 3% as compared to CPLY. We also expect a final cash dividend ofPKR20/share along with the result which will take the full year diluted cashdividend to PKR47.3/share.We reiterate our stance of subdued volumetric sales going forward due toupward revision in sales tax rates from 5% to 10% w.e.f. January 2013 whichwill be further raised to 17% from January 2014. However, the aforesaid willbe mitigated if any tractor scheme is announced or measures are taken toenhance the purchasing power of farmers by protecting them against higherinput cost and offering reasonable crop support prices. Trading at FY14 P/Eof 11.0x, we upgrade our stance to “Hold” mainly due to TP roll forward.QoQ robust volumetric growth will significantly give rise to earningsQoQ robust volumetric growth of 86% has been witnessed in 4QFY13 mainly due toSindh tractor scheme as well preemptive buying in the month of June as the companyin early June intimated its decision to raise prices at June end. Moreover, launch ofimproved tractor models and increase in wheat price (ultimately boosts earnings ofthe farmers) have increased the performance of the quarter under discussion. Resultantly,net sales and gross profits are expected to augment by 86% and 72% QoQ,respectively.OutlookThe company is planning to export tractor and parts to Africa and China and hopes tosell a sizable amount in the export market since as per the company officials, Pakistanitractor prices are cheaper than India tractors. Being conservative we await anyconcrete development on this front before incorporating any exports of tractor. Weare foreseeing good volume in July 2013 since MTL has raised prices w.e.f. June 21,2013 with a direction to dealers / ZTBL & Commercial banks / Government of Sindh–Sindh tractor scheme that all payment instruments of June 20, 2013 or earlier mustbe received latest by June 30, 2013 in order to get tractor at old price.TAURUS SECURITIES LIMITED INSIGHT

Millat tractors reported 12% higher net profit of Rs 2.13bn (EPS Rs 53.11) for FY13 against Rs 1.9bn (EPS Rs 54.03) in last year. Company reported 12% higher net sales of Rs 22.7bn in FY13 against Rs 20.13bn in FY12, the gross profit margin stood at same position of 17.5% in both years. The higher sales are due to the company's exports business performance.

Triggers

· Tractor sales pick up in Sept. onwards

· Exports to China

· Price increase effect to come in coming quarters. The prices of different variants increased by 4% - 5%

· MTL to continue over capacity

Production

· The impact of floods is lesser as against last year and even then tractor sales remained robust

· The deal between FF and MTL management is in a ping pong stage

· Govt. of Punjab may come up with new schemes in Dec - Jan

Export Business: A green field ahead

MTL's key product Messey Ferguson tractor has high demand in Pakistan as well as in overseas which leads the company to operate plant on over capacity.

Currently company has 30,000 tractors per annum production capacity, but for the last two years company is producing more than 32,000 tractors per annum to meet the exceeding demand.

We expect that company may go for expanding the production capacity in future because company sees a green area for their products in overseas. This time we also see MTL tractors going to China as well owing to supplier's arrangement under the auspices of Messy Ferguson of UK. We will take the impact of 1000 units.

Punjab government tractor scheme: to boost the sales

In December 2012, Punjab government conducted tractor scheme for farmers which increased tractor sales by more than 10, 000 units. In FY13, government has already imposed ban on importing the tractors so local demand is full filled by the two local companies Al Ghazi and Millat tractors. Being a market leader with 65% market share Millat tractors has competitive edge over other peer.

It is also expected that Punjab government will soon come with 2nd phase of same tractor scheme in first half of FY14 which will also beef up company production.

Valuation:

Usually company reports relatively lower EPS in 1Q as compared to other quarters. Based on future incremental earnings in 2HFY14 MTL yields PE of 9x, we set our HOLD stance for MTL. The endeavor by Fauji Foundation to acquire MTL holding is seems to be in progress.

MTL reported FY13 PAT of PKR2.1bn (EPS PKR: 48.28-bonus adjusted) up by 8% YoY, while volumetric sales remained stable. The company also announced a final cash payout of PKR25/share, thus taking the full year dividend to PKR55/ share. The result & dividend were in line with our expectations. On a QoQ basis, 4q earnings showed a remarkable growth of 116% due to partial completion of Sindh tractor scheme as well as pre-buying done due to price increase w.e.f. June 21, 2013 which significantly boosted the 4Q sales.

Our preliminary estimate of 1QFY14 result shows that earning can drop to as low as PKR7.2/share (around 55% QoQ decline). This is attributable to the depressed sales volumes in 2MFY14 which will result in QoQ sales dipping by 66%.

Going forward in FY14, we foresee tractor sales to decrease by 25% due to rise in sales tax from 10% to 17% w.e.f. January 2014. On the other hand, we do not expect any meaningful tractor scheme going forward in the near term due to fiscal tightening under IMF program. Updating our macro assumption, decreasing the sales volume assumption as well as raising the risk free rate has resulted in TP revising down to PKR446/share. Trading at FY14 P/E of 13.8x, we maintain our Hold stance.

Millat Tractors Limited (MTL) is Pakistan's leading engineering concern in automobile sector. It was established in 1964 to introduce and market Massey Ferguson Tractors in Pakistan. An assembly plant was set up in 1967 to assemble tractors in Semi-Knocked-Down (SKD) condition and the Company was then nationalised in 1972.

Subsequent its privatisation in 1991, MTL has grown in size, with the acquisition of Bolan Casting Limited in 1993 and the incorporation of a new subsidiary named Millat Equipment Limited, which undertook manufacturing of high-tech automotive gears in 1994. Apart from Tractors, MTL is currently engaged in the manufacture of engines, industrial and agricultural machinery as well as material testing and gauge control laboratory equipment. Additionally, MTL is also engaged in the manufacture of diesel engines, Diesel generating sets and prime movers as well as forklift trucks-all under license from Anhui Heli Forklift Trucks of China.

HIGHLIGHTS 4Q FY13 On a quarter-on-quarter basis, the 4Q FY13 saw Millat rebounding in a big way to close a year that largely remained depressed for tractor manufacturers. The quarter saw the earning witnessing a remarkable 116 percent accretion largely off the back of the purchases made by the Sindh government in lieu of the Sindh tractor scheme. Additionally, the Company announced across the board price increases which were to come into effect in late June, inciting a round of pre-buying by farmers. The quarter which coincided with the Rabi harvest is typically a bumper one, and this one saw net sales climb up 87 percent quarter on quarter off the back of higher agricultural incomes led by higher commodity procurement prices in the domestic markets. Subsequent stronger margins and better utilisation of financial sources allowed the Company to post a PAT of Rs2.1 billion despite a less than stellar year. The Company also announced a final cash dividend payout of Rs25/share, taking the full year dividend to Rs55/share.

HIGHLIGHTS FY13 On the whole FY13 turned out to be a less than lucrative year for the country's tractor manufacturers as the industry suffered stunted sales. The absence of any sort of government subsidized tractor scheme was sorely felt by the industry this year as demand for agricultural machinery remained otherwise slow.

MTL and its group companies which comprise of Millat Equipment, Millat Industrial Products Limited and Bolan Casting altogether have a capacity to produce nearly 50,000 tractors per annum. With sales decreasing substantially-having fallen down to 32,000 units in 2013, from more than 40,000 units sold in 2011-Millat has largely been unable to achieve full capacity and is reportedly utilising only 20 percent or so of its production capacity (as of September 2013).

In a bid to successfully put to use the surplus capacity, MTL and its group companies are reportedly looking to tap into international demand. In this regard, Millat Tractors has reportedly struck a deal with Massey Ferguson-in that the Company will buy CBU tractors from MTL to sell them in the African markets and also purchase semi-knocked-down kits and parts to export to Africa and China where MF has already set up an assembly plant.

To tackle foreign sales, MTL has already established an offshore subsidiary company in the JLT Free Zone area of Dubai which will act as a trading company between the foreign buyers and Millat group of companies with an objective to boost export sale. In this respect, Rs40.275 million (as of June 30, 2013) have already been remitted after getting necessary approval from State Bank of Pakistan under Foreign Exchange Regulations and the subsidiary will start commercial operation in FY14 according to the Company reports .

OUTLOOK Going forward to FY14, analyst consensus remains that there is going to be a significant decrease in tractor sales. This will be largely due to rise in sales tax from 10 percent to 17 percent-the rise is set to come into effect on January 2014. Similarly the lack of any sort of publicly funded tractor schemes in the upcoming months due to the government's changed stance on spending will see demand largely tapering off.

Currently, the country's indigenous tractor industry is almost at a standstill-with depressed demand having forced Al-Ghazi Tractors-Millat's biggest competitor in the domestic market-to stop production for the last three months. This has rendered a huge number of suppliers and thousands of workers who work in these factories and down-stream industries jobless. Hence, Millat's stance to look at the export markets is a laudable and well-timed move. The incoming export revenue will definitely improve things for MTL as well as its associated companies and will act as a positive catalyst for future earnings amid a depressed local sales scenario.

Tractor Industry! Tractor sales in September showed a decline of 9% MoM with MTL’s sales witnessing a dip of 20%. Moreover, 1QFY14 sales faltered by 40% YoY with a major decline of 51% witnessed in AGTL. MTL remained the market leader in September as well with a 65% share. We reiterate our stance of sub?dued tractor sales going forward due to rising level of taxation on tractors, declining subsidies, high inflation, flood hit farmers and the recent hike in utility tariffs which has led to dead level produc?tion despite having capability of producing 70,000 units annually. Considering the above scenario, AGTL has stopped its production during the last three months while Millat Tractors Ltd is presently operating at only 20 percent of its total production capacity. On the other hand, we don’t expect any new tractor scheme going forward in the short term due to fiscal tightening under the IMF pro?gram.

We preview Millat Tractor’s 1QFY14 result and foresee that the company will report a net profit of PKR325mn (EPS PKR7.33) down by 54% QoQ. This is attributable to the depressed sales volumes in 1QFY14 which will result in QoQ sales dipping by 67% due to flood situation in Sindh & Punjab as well as absence of any meaningful tractor schemes both from Sindh & Punjab Government.

We reiterate our stance of subdued volumetric sales going forward as well due to upward revision in sales tax rates from 10% to 17% w.e.f. January 2014 as well as inflationary measures in the absence of substantial farmers support schemes. However, the aforesaid can be mitigated if any new tractor scheme is announced.

While trading at an expensive FY14 P/E of 12.6x, we are maintaining our “Hold” stance as we await any positive development from its newly established subsidiary (Hub office b/w MTL & foreigners) in UAE recently started in order to export to African countries, Afghanistan & Other countries in the region.

Millat Tractors Limited had ended the previous fiscal on a high as purchases by the Sindh government had provided a welcome boost to sales in 4Q FY13. But by the time the new fiscal commenced, that surge was history. As expected, higher taxes on tractors have also taken a bite out of demand.

The first three months of FY14 were lackluster for the countrys largest tractor manufacturer, as its top line shrank by a hefty 25 percent compared to 1Q FY13. During the same period of last year, the company had sold 4,782 units of its Massey Ferguson brand tractors. This time around it managed a relatively muted tally of 3281 units.

The shrinkage at the top took a toll on the bottom line, somewhat compounded by rising administrative costs which inched up three percent. Slow sales also meant a slide in other operating income, during the period under review.

Market analysts concur domestic sales will likely remain weak during the rest of the fiscal year. Millat Tractors Limited has already been struggling to improve capacity utilisation at its facilities. It has set up an office in Dubai in a bid to boost international sales. A strong comeback later in FY14 may be hinged on the companys ability to attract international demand.

Millat Tractors Limited had ended the previous fiscal on a high as purchases by the Sindh government had provided a welcome boost to sales in 4Q FY13. But by the time the new fiscal commenced, that surge was history. As expected, higher taxes on tractors have also taken a bite out of demand.

The first three months of FY14 were lackluster for the countrys largest tractor manufacturer, as its top line shrank by a hefty 25 percent compared to 1Q FY13. During the same period of last year, the company had sold 4,782 units of its Massey Ferguson brand tractors. This time around it managed a relatively muted tally of 3281 units.

The shrinkage at the top took a toll on the bottom line, somewhat compounded by rising administrative costs which inched up three percent. Slow sales also meant a slide in other operating income, during the period under review.

Market analysts concur domestic sales will likely remain weak during the rest of the fiscal year. Millat Tractors Limited has already been struggling to improve capacity utilisation at its facilities. It has set up an office in Dubai in a bid to boost international sales. A strong comeback later in FY14 may be hinged on the companys ability to attract international demand.

After years of struggle, Millat Tractors will start exports in a few weeks in what will be the first time such value-added engineering goods made in Pakistan are sold to foreign customers, officials told The Express Tribune.Millat is already selling some tractor components in India but a deal with Massey Ferguson will soon lead to export of complete tractors to Afghanistan and some African countries.“A team from Massey Ferguson was here to see our plant and process,” said Sikandar Mustafa Khan, Chairman of Millat Tractors. “They have asked us to rectify a few things. Quality has to be spot on and we have to meet those international standards.”Millat manufactures tractors in Pakistan under licence from Massey Ferguson, which is part of American farm instrument maker AGCO.The Pakistani company, with over Rs20 billion in sales, remained under licensing restriction on export. However, it finally struck an agreement with AGCO earlier this year to start selling tractor components and semi-knocked down units in foreign markets.“Let’s see how much of a big success this turns out to be for us,” said Khan who has been leading the company since an employee-buyout placed it in private hands in 1992.Tractor sales have been hammered in the past two years after the government imposed new taxes, industry people say, adding to the pressure on Millat to explore other markets at the earliest.Khan said industry sales have dropped tremendously from 70,000 units just three years ago. “I suspect sales will go even down this year.”The government had increased sales tax to 10% from the previous year. It will go up to 17% from January 2014. Until 2008, the industry was exempted from sales tax.“Agriculture depends mostly on small farmers who own 10 to 15 acres of land. So when sales tax pushes up prices, these farmers can’t afford and tractor sales take a hit,” said Khan.Instead of subsidising sales through cash distribution schemes for purchasing tractors, which are often misused, the government must do away with the tax, he said.Like other developing countries, Pakistani government also considers increasing use of tractors as a step towards mechanisation of agriculture that enhances farm output and cuts losses.Tractor sales fluctuate with agricultural income as farmers are able to spend more on farm inputs after reaping benefits of a bumper crop. But the tractor industry has steadily expanded over the years.From production of just 13,841 tractors in 1991, the output touched a high of 71,730 in fiscal year 2009-10, according to the finance ministry’s Economic Survey. Production dropped to 36,121 tractors in July-March 2012-13.According to the last Economic Survey, the price of a basic 50 or 55 horsepower tractor ranged from Rs650,000 to Rs715,000. A 5% increase in sales tax would have added Rs32,500, an amount that doesn’t appear large for someone already spending in six figures.“But it does matter a lot,” says Asim Ali Zaidi of Taurus Securities. “Economic condition is not good. Power tariff has gone up, the price of diesel has also gone up and then the schemes for financing these tractors are erratic,” he said.Farmers who were buying tractors have probably reverted to the pool system where they share a machine among themselves, he said.Published in The Express Tribune, November 7th, 2013.